False Discoveries in Mutual Fund Performance: Finding Lucky Alphas

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Laurent Barras~O. Scaillet~R. Wermers, Suisse
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Summary:
This paper examines the impact of luck on mutual fund performance. Lucky funds have an alpha found to be significant although they have in reality an alpha equal to zero. To measure it, we use the False Discovery Rate (FDR), which is defined as the proportion of lucky funds. By explicitly controlling for luck, the FDR provides important results that could not be obtained with previous methodologies. We show that a large proportion of the worst funds truly yields negative alphas after accounting for luck. This is the case for all investment categories. We also find that for some investment categories a tiny fraction of the best funds are able to deliver positive performance.
 
Date: 2 June - Time: 8:30 to 10:00 - Room: 241
Theme: 9.A. Various topics